In an era of consolidation, will fintech retain its spirit of innovation?
The level of M&A activity in fintech last year was staggering.
According to CB Insights’ 2021 State of Venture Report, which looks at investment activity across the year, fintech companies around the world raised a record-breaking $132 billion.
It was bumper deals, IPOs, and mergers galore, yet many market watchers expect 2022 will be even bigger. Personally, I believe that when fintech does well, society does too.
However, it’s fair to question the consequences of all this activity. The unprecedented level of consolidation in the market may stoke fears that innovation will be stifled. We must ensure fintech retains its spirit of innovation and continues to do well for the benefit of all.
What’s going on in M&A?
Fintech has been a distinct industry for roughly two decades and many of its highest-profile stars have been start-ups where bold ideas flourish.
These fintech start-ups brought speed and cutting-edge technology to almost every financial process imaginable – from payments and settlement to investments and insurance. Consumers and businesses have been the beneficiaries through ease of use, lower costs, and greater flexibility.
At the same time – and in large part inspired by the success of the fintech industry – the big financial players have recognised the need to offer more innovative digital services. Even today, many banks find it difficult to deploy new systems and processes across the entire enterprise and, even when they do, it doesn’t always happen quickly or easily.
This is driving banks and other big financial players to buy up stars of the industry and diversify their businesses away from legacy systems. The basic rationale is straightforward – if you want to develop an entirely new capability, or enter a new market, but can’t do it quickly enough to beat competitors, acquisition is the only option.
These days, some of the biggest fintech stars are even getting in on the action. Just look at Square’s $29 billion acquisition of Afterpay.
A threat to innovation?
With M&A, however, there are always risks – and when it comes to fintech, culture clash is arguably the biggest.
Cultural incompatibility is often the root of failed or poorly performing mergers and acquisitions. Some leading thinkers in business psychology have argued the key to success and failure comes down to tight and loose corporate cultures. Tight cultures value consistency, routine, and strict values. Loose cultures favour new ideas, creativity, and openness over rules and processes. Unsurprisingly, mixing a very tight culture with a very loose culture can end badly.
At face value, it’s easy to bundle financial institutions together as tight compared with looser fintech upstarts. But it’s not that simple. Not every financial mainstay is tight, and not every fintech is loose – the key is for both companies to take an honest appraisal of where they sit on the scale and decide what they’re willing to negotiate and what they’re not.
Well-balanced, sensible integration that prioritises adding value for both sides (for instance by giving the smaller parties access to more resources, new markets, and experienced corporate talent) while retaining innovation and corporate identity can mean you get the best of both worlds – there’s no intrinsic reason for big finance to be incompatible with fintech.
Finance has no shortage of unmet needs – and fintech has plenty of answers
What we’re seeing is part of a very natural business cycle. It doesn’t pose a serious risk of reducing competitiveness and innovation in what is a vibrant market, as there are still so many challenges yet to be met.
Several subsectors are prime candidates in this regard. Wealthtech, for example, is growing rapidly and beginning to disrupt a stagnant wealth management industry. Insurance is another area that has remained virtually unchanged for many decades – and now is ripe for a shake-up by insurtech companies.
Then you have cryptocurrencies and the broader realm of decentralised finance. Early fintechs were able to thrive when the internet broke down the door to conventional finance. Today, DeFi has the potential to smash the whole lot down and build something new – it represents a true paradigm shift, one the world is yet to get to grips with.
There’s no denying that decentralised finance is a long way from bridging the chasm and making the all-important leap from the early adopters and evangelists to being something your parents understand. And given how revolutionary it is, it’s likely it will take far longer to cross that chasm than fintech did.
That aside, there’s a very real chance that many of the most exciting companies of tomorrow will emerge from DeFi, or at least be adjacent to it, and some of them may even end up being acquired by the now established fintech stars of today.
The market’s natural evolution
Far from throwing water on the fires of innovation, M&A can make the fintech industry more successful. Of course, on an individual basis it will be important to evaluate culture and get that vital exchange right. But by funnelling resources to the most innovative minds, the market can help the industry reach its full potential, which we are still some way from achieving.
And that’s before we have even touched on how we can transform the yet-to-mature subsectors and segments across the fintech ecosystem and beyond. There will always be challenges, efficiencies to find, costs to reduce, and ways to make things easier. And most importantly of all, there will always be people willing to take a risk and put the latest technology to the task.